Cash-for-Clunkers Is a Poor Choice of Stimulus 11 comments
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The U.S.'s “Cash for Clunkers” program is already being hailed as a success, in large part because it has already burned through all (or almost all) of the $1 billion in government funding to subsidize the program. As a result, there is a tremendous amount of political pressure on the U.S. government to pour more billions into the program.
From a political standpoint, this is a “win-win” program. It makes auto-makers happy. It makes auto-workers happy. It makes auto-buyers happy. And because it is easy for the general public to grasp how this simple (simplistic?) program operates, it produces widespread, favorable sentiment among the voting population.
The problem is that for a number of reasons it makes poor economic sense – and is thus a highly dubious way to attempt to stimulate the U.S. economy. To begin with, for a lot of consumers, automobiles are a “non-performing asset”. That is, buying/owning an automobile does nothing to increase income or wealth. Indeed, typically an automobile is one of the most expensive forms of consumption – since not only does the vehicle begin to depreciate in value the moment it is purchased, but insurance, maintenance, and fuel costs make it second only to a house in terms of upkeep costs.
However, there are two huge differences between homes and cars which make investing in the former much more economically prudent than spending on the latter. To start with, over the long-term, a house (and real estate, in general) is an asset that appreciates in value over time. Granted, the current collapse in the U.S. housing sector may be a decade-long “exception to the rule”, but the general principle is valid.
Secondly, in addition to capital appreciation, a house satisfies one of our living necessities: shelter. The only alternative to buying a house is to rent. While it's generally cheaper to rent a home than to own one (on a month-to-month basis), typically that differential is small enough to encourage people to buy a home as soon as it is practical.
True, automobiles provide transportation, which at some level is also a “necessity”. However, for urban dwellers, there is a much more cost-effective option: public transit. While the U.S. has a dismal public transit system in most of its cities, the main reason for this is decades of over-consumption and over-reliance on automobiles. Obviously, a program which provides a large, financial incentive to continue to shun public transportation is not going to help the U.S. join the 21st century when it comes to public transportation.
Indeed, pushing people (back) toward automobiles will reduce the rate of return on public transportation investments, and discourage further investment. In other words, from a government perspective, this is short-sighted policy which adds yet more billions to federal debt while undermining other government projects and initiatives.
Returning to the perspective of individual Americans, this program is highly counter-productive in many ways. First of all, since ordinary Americans don't have the Federal Reserve and the Treasury Department standing by to pay off all their debts (like they do for the bankster oligarchs), Americans must pay down their debts.
Like the U.S. government, American consumers devote far too much of their spending-power paying interest on their debts. With incomes which are steadily falling, the only way Americans will ever be able to become the robust consumers which they once were is to lower their debt-load.
Thus, a “stimulus” program which provides them with a fat “carrot” to encourage them to go further into debt is yet one more U.S. economic policy which mortgages the future for Americans. On a more personal level, Americans have a long history of making terrible consumption decisions with respect to automobiles.
It was their obsession with the huge gas-guzzlers of the 1950's and 1960's which created the “energy crisis” of the 1970's. Similarly, short-sighted Americans discarded their fuel-efficient vehicles the moment that gas prices fell – and went on a multi-decade binge of new behemoths, many of which got no better gas mileage than the gas-guzzlers built 50 years earlier. The result of that binge was a second (and permanent) “energy crisis”.
Sub-$100/barrel oil is only a temporary aberration today. With most of the world's economies in the midst of emerging from recession, and with long-term supply/demand fundamentals for oil nothing less than frightening, excessive automobile consumption will merely make the next spike in crude prices that much more punitive.
However, American irresponsibility in automobile purchases goes well beyond fuel economy. Americans feel compelled to continually trade-in their cars for something newer – with “bells and whistles” which their car of 3 or 4 years ago doesn't have. Tempting these debt-junkies into buying new cars is economically equivalent to dangling a bag of crack in front of a cocaine-addict.
There are two consequences of this trade-in compulsion. First of all, there are far too many vehicles for the size of this market. The resale price for used cars has plummeted, and the “Cash for Clunkers” program will add to that glut. This immediately knocks billions of dollars off the resale value of the millions of vehicles currently on the market – almost completely negating the economic benefits of this program all by itself.
The second problem with the automobile “fetish” of Americans is that they have taken on far more automobile debt than they are capable of paying off. As Americans began trading in their vehicles more and more often, with less and less money for a down-payment (and as vehicle prices soared), this meant that Americans started taking out much bigger auto loans – amortized over much longer periods.
This drastically increases the amount of interest Americans pay on these loans, and has also drastically increased the percentage of Americans with “under-water” car loans (that is, they owe more than their vehicle is worth). The last statistic I heard on this dreadful statistic is that over 40% of all car loans are “under-water”. That statistic is well over a year old, before the U.S. economic collapse became severe, before default-rates on auto loans soared to the current, all-time record, and before the collapse in value of used cars. Obviously the rate of “under-water” car loans is now somewhere above 50%.
Thus, while this program provides considerable short-term psychological relief for Americans, over the medium and long term, encouraging the world's most irresponsible borrowers to take on much more debt – when their home-equity is gone, they are losing their jobs, they are behind on their mortgages, and their wages are falling – is nothing less than economic suicide.
Encouraging millions of near-bankrupt Americans to take on billions more in debt also diverts those billions of dollars in spending from the broader retail sector. This means vast numbers of additional retail sector jobs being lost, along with accelerating bankruptcies in this sector.
Thus, the “legacy” of Cash-for-Clunkers is a big jump in personal bankruptcies, a net loss in employment, and further acceleration in corporate bankruptcies – which means additional huge losses in the U.S. commercial real estate market, as that market is just beginning to fully collapse, and with it facing the greatest need for refinancing maturing debt in history.
All of these factors lead back to the U.S. financial sector, and more huge losses on their balance sheets (leveraged anywhere from 10:1 to 30:1). Ultimately this will send the bankster-beggars back to the government for more hand-outs.
This is yet one more attempt by the U.S. government to “cure” the various ills it is suffering from burst-bubbles by creating one more bubble. “Putting out the fire with gasoline” is an economic policy which always produces predictable results.
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I’ve heard defenders of the program cite all the auto workers jobs it saves. Fine. Why did the govt refuse help for CIT? A 7/31 AP article notes $3B (sound familiar?) loan secured through private financing cause the govt would let them fold. So how important is CIT? Per Barron’s:
• CIT provides commercial finance services to about ONE MILLION SMALLER BUSINESSES (How many jobs is that?)
• Every day that CIT holds those unsecured credit balances -- cash due its customers -- more factories close and more workers lose their jobs.
• The Treasury was in close contact with Wall Street players during the crises precipitated by the failures of Lehman and Bear Stearns last year. But it appears indifferent to the pleas of smaller businesses that pose commensurate systemic risks to the global supply chain
online.barrons.com/art...
You’ve well covered the impact of more debt and less consumer spending power elsewhere. So was there any real net benefit?
(1) Again, the government has put itself in the business of allocating scarce resources.
(2) It isn’t clear the program will lead to more auto production over time, since the clunker cash may simply cause buyers to move their purchases forward.
(3) As usual, spending or accumulation of debt is rewarded while thrift, savings and investment is penalized.
(4) And, lastly, perfectly good cars are being destroyed which could have been sold to one or more third world countries.
Houses "appreciate" only because of ongoing dollar debasement. A piece of land can grow in value if its location makes it more highly desirable over time, but a house is just a durable good. More durable than a car, but it nevertheless is worn out over time and eventually becomes worthless.
Government cannot beneficially stimulate the economy except by shrinking itself. If politicians actually want a stronger economy they should eliminate market interventions, cut government spending, cut taxes, eliminate costly regulations, eliminate tariffs, and give us an honest system of money.
I know. It's never going to happen -- but I don't have to pretend that government spending can be economically beneficial.
I'm going to have to disagree with you generalization of government - even though it's often correct.
The main reason that government policies are seen as being generally inferior to private-sector actions is not because government is inherently inferior.
Rather, it is because politicians generally choose politically expedient options rather than simply trying to choose the best option.
An example of "good stimulus" would have been what I urged my own government to do last year, and precisely what the Chinese government did this year: stockpiling commodities.
Most analysts agree commodities are headed much higher. If the Canadian government would have simply bought-up lots of commodities last fall it would have a) put a floor in commodity prices, b) saved (at a minimum) tens of thousands of jobs (a significant number for Canada's population) and c) turned a PROFIT for taxpayers when the government sold those commodities in the future.
There is no law saying that governments CAN'T make smart decisions (it just seems that way).
The relatively well off people who own decent cars already will go scronge for a clunker to trade in because they are due for a new car anyway.
The poor that really need a decent car that runs better can not participate, but their taxes too will pay for those who could take advantage.
Plus Bottom line: There is no advantage given to American companies and autos.
It is time that our Country and its people buy American again, even if it costs a little more.
Assembled doesn't mean manufactured...where were the parts made and where do the profits go?
Historically, repeatedly in the rise and decline of all of the great economic powers there were 6 things that always occurred:
1. One country secured an economic advantage, rather product or trade route, and applied that advantage to become a major economic power.
2. A second country learned (diffusion of technology) what that advantage was and copied it, becoming even more competitive then the economic power.
3. The second country, now being the more competitive, imported their product into the major economic power's markets. The people bought the import because it was good quality and cost less. The citizen's purchases of imports over domestic products led directly to their own country's economic decline.
4. The governments of the economic power were rigid, hamstrung and unable to respond to protect their own markets.
5. Once on the decline the armies of the economic power were always fully deployed in the furthest reaches of the empire.
6. There was always a moral decline in the people's behavior in the economic power. Decadence...perversion whatever.
Buy American!!! GM is American. Ford is American.
The military industrial complex is a perversion of what we have become great at producing.
We have given away almost all of the domestic industries we were great in. It is time we reclaimed some of them, and bought American even if we pay a little more. It is either that, or collectively become poorer until the dollar collapses and the importers move on to other markets, and we are forced to produce for ourselves anyway.
I don't want to get too argumentative about this, but in fact there is a reason why governments should not intervene in the markets -- they never achieve the desired goal for multiple reasons. Consider reading Mises' book "Interventionism, An Economic Analysis." mises.org/store/Interv... There are also some essay collections on this topic, all quite readable and compelling, IMO.
If government expenditures are made from tax receipts or borrowed money, the government is just pushing the economy around to favor something that people wouldn't have done on their own. If the government spends newly "printed" money, it is distorting relative prices and directly causing capital consumption.